Swedbank Capital Buffers Swell as Quarterly Net Tops Estimates

By Niklas Magnusson -
Oct 22, 2013

Swedbank AB (SWEDA), the second-best
capitalized major bank in Europe, reported a 19 percent jump in
third-quarter profit on higher lending income and lower loan
losses and said its capital buffers increased.

Net income rose to 4.17 billion kronor ($652 million) from
3.5 billion kronor a year earlier, the Stockholm-based company
said in a statement today. That beat the average estimate of
3.87 billion kronor in a Bloomberg survey of 12 analysts.
Swedbank rose the most in almost nine months in Stockholm
trading and reached a six-year high.

Sweden has subjected its banks to some of the strictest
capital rules in the world and warned it may raise requirements
further next year after housing prices and household debt levels
soared to records. Swedish banks, the best capitalized lenders
in Europe, already exceed the government’s 2015 capital
requirement, sparking speculation lenders will increase
dividends or make extraordinary payouts to shareholders.

“We welcome the increased regulation of the financial
sector, which in recent years has produced a more sustainable
international banking system,” Chief Executive Officer Michael Wolf said in the statement. “At the same time we must state,
from a Swedish perspective, that increased capital requirements
on banks will never solve the imbalances in the housing
market.”

Swedbank gained as much as 6.2 percent to 173 kronor, its
steepest intraday advance since Jan. 30 and highest price since
Oct. 24, 2007. The stock was 4.2 percent higher at 169.80 kronor
by 9:42 a.m. local time, with trading volume at 106 percent of
the daily average in the past three months.

House Prices

Sweden has taken several measures to try to stem growth in
household borrowing and house prices amid concern a bubble is
developing. The steps include capping mortgages at 85 percent of
property values and tripling risk-weights on mortgages. While
the steps have helped slow loan growth, house prices are still
climbing and debt loads have risen to record highs of more than
170 percent of disposable incomes, according to the Riksbank.

Apartment prices, which more than doubled since 2000,
increased 14 percent in the 12 months through August, according
to data from Svensk Maeklarstatistik, which publishes monthly
data on Swedish real estate. The price of single-family houses
advanced 4 percent since August last year, it said. State-owned
mortgage lender SBAB warned on Oct. 18 that there is a risk of
overheating and that prices are likely to continue to rise.

Not Optimal

“We want to help our customers to buy a home and will
gladly provide financing for new construction,” Swedbank’s CEO
Wolf said. “But we are not willing to take part when the same
properties are mortgaged at ever increasing levels. In our view,
the increased capital requirements on banks are not an optimal
way to provide a solution to Sweden’s problem of too little
housing, which dampens potential growth.”

Swedbank reported a common equity Tier 1 ratio under Basel
II regulations of 18.8 percent at the end of September, compared
with 18 percent at the end of June, and a ratio of 18 percent
under Basel III, compared with 17.2 percent at the end of June.
The bank said in its second-quarter report that it needs a ratio
of about 15 percent under Basel III rules. The bank said today
it expects its ratios to get even higher.

“We are awaiting approval from the Swedish Financial
Supervisory Authority to use an advanced model to calculate risk
weights on Swedish corporate lending, which will further improve
our capital ratios,” Swedbank said. “In order to set a new
internal capital target, we need a clear ruling from the
authorities on future capital requirements for Swedish banks.”

Dividend Policy

The lender, which earlier this year raised its dividend
payout ratio to 75 percent of net income, is the second-best
capitalized major bank in Europe in terms of core Tier 1
capital, after Svenska Handelsbanken AB. (SHBA) Its dividend ratio is
likely to remain the same, even as the government warns it may
raise capital requirements and risk-weights further, it said.

There would have to be “a lot of regulation and
significantly higher capital rules” for Swedbank to have to
revise its dividend policy, Wolf and Chief Financial Officer
Goeran Bronner said on a conference call with reporters today.

Sweden’s biggest banks are already subject to some of the
strictest capital rules in the world, requiring them to hold a
core Tier 1 ratio of at least 12 percent by 2015, a requirement
Swedbank and its peers all already fulfill. The government has
told banks it may raise capital requirements further to try to
protect the economy from any new crisis in an industry that has
swelled to four times the size of the nation’s economy.

Swedbank’s net interest income advanced 11 percent to 5.64
billion kronor in the third quarter while net commission income
rose 6 percent to 2.52 billion kronor. The bank recovered 56
million kronor of money set aside for loan losses after
reporting impairments of 36 million kronor a year earlier.